and Submitted August 3, 2016 Pasadena, California
from the United States District Court for the Southern
District of California, D.C. No. 3:11-cv-01282-WQH-DHB
William Q. Hayes, District Judge, Presiding
M. Carstensen (argued), Jodi S. Green, and Barbara I.
Michaelides, Nicolaides Fink Thorpe Michaelides Sullivan LLP,
Chicago, Illinois; Paul D. Motz and John W. Patton, Jr.,
Patton & Ryan LLC, Chicago, Illinois; Christopher R.
Wagner and David L. Jones, Gordon & Rees LLP, Los
Angeles, California; for Defendant-Appellant.
Christopher Martin (argued), Melissa A. Meth, and Douglas C.
Rawles, Reed Smith LLP, Los Angeles, California; Thomas W.
Ports, Jr., Tillman J. Breckenridge, and Gary S. Thompson,
Reed Smith LLP, Washington, D.C.; for Plaintiff-Appellee.
Before: Diarmuid F. O'Scannlain, Johnnie B. Rawlinson,
and Consuelo M. Callahan, Circuit Judges.
panel affirmed the district court's judgment in favor of
the insured, LMA North America, Inc., and award of
attorney's fees, and denied National Union Fire Insurance
Company of Pittsburgh, PA's motion for certification of
an issue to the California Supreme Court, in LMA's
diversity contribution action against its excess insurance
carrier, National Union.
Diamond Heights Homeowners Ass'n v. Nat'l Am.
Ins. Co., 227 Cal.App.3d 563 (1991), a California
appellate court held that an excess insurer has three options
when presented with a proposed settlement of a covered claim
that has met the approval of the insured and the primary
insurer: approve the proposed settlement; reject it and take
over the defense; or reject it, decline the defense, and face
a potential lawsuit by the insured seeking contribution.
LMA's breach of contract claim, the panel held that the
district court correctly followed the Diamond
Heights rule in this diversity action governed by
California law because the case had not been overruled and
was not distinguishable. The panel also held that the
district court did not commit prejudicial err in defining the
standard of proof applicable to LMA's breach of contract
LMA's bad faith claim, the panel held that the district
court correctly concluded that the genuine dispute doctrine
was subsumed within the standard Judicial Council of
California Civil Jury Instructions for breach of good faith
and fair dealing, which the district court gave to the jury.
The panel concluded that the district court did not err in
denying National Union's proposed jury instruction on the
genuine dispute doctrine. The panel also rejected National
Union's argument that it acted reasonably due to a
genuine dispute existing about the application and viability
of Diamond Heights. The panel held that a jury could
reasonably conclude not only that the settlement was
reasonable, but also that any dispute about coverage was less
than genuine. The panel, therefore, rejected National
Union's challenge to the bad faith claim based on the
sufficiency of the evidence. The panel held that the district
court did not err in awarding attorney's fees that LMA
failed to segregate between work done on its recoverable and
nonrecoverable claims. The district court concluded that the
district court's chosen apportionment of the fees
appeared to be fair under California law.
CALLAHAN, Circuit Judge:
Diamond Heights Homeowners Association v. National
American Insurance Co., 227 Cal.App.3d 563 (1991), a
California appellate court ruled that an excess liability
insurer has three options when presented with a proposed
settlement of a covered claim that has met the approval of
the insured and the primary insurer. The excess insurer must
(1) approve the proposed settlement, (2) reject it and take
over the defense, or (3) reject it, decline to take over the
defense, and face a potential lawsuit by the insured seeking
contribution toward the settlement. Id. at 580-81.
Under Diamond Heights, the insured is entitled to
reimbursement if the excess insurer was given a reasonable
opportunity to evaluate the proposed settlement, and the
settlement was reasonable and not the product of collusion.
diversity case presents such a contribution action. The
insured, LMA North America, Inc. (LMA),  sued its excess
insurance carrier, National Union Fire Insurance Company of
Pittsburgh, PA (National Union), in connection with National
Union's refusal to either contribute $3.75 million toward
the settlement of claims brought by a third party or take
over the defense. We must decide whether the district court
erred in applying the Diamond Heights rule,
instructing the jury, denying National Union's motion for
judgment as a matter of law, and awarding fees and costs. We
LMA's insurance policies
two general liability insurance policies covering claims that
LMA disparaged other companies: (1) a primary policy issued
by Transcontinental Insurance Company (called CNA) with a $1
million limit, and (2) an excess policy issued by National
Union with a $14 million limit.
National Union policy contained a "no voluntary
payments" provision stating that "[n]o insureds
will, except at their own cost, voluntarily make a payment,
assume any obligation, or incur any expense, other than for
first aid, without [National Union's] consent." The
policy also contained a "no action" clause stating
in relevant part that "[t]here will be no right of
action against us under this insurance unless . . . [t]he
amount you owe has been determined with our consent or by
actual trial and final judgment." The policy also
recognized National Union's right to
"participate" in the defense of a claim and,
following exhaustion of coverage by the primary insurer, a
"duty to defend" the claim.
The underlying Ambu litigation
its competitor Ambu distribute competing laryngeal mask
airway products. In 2007, LMA brought a patent infringement
suit in federal district court against Ambu related to
certain laryngeal masks. Ambu filed trade disparagement and
false advertising counterclaims, demanding $28 million. The
counterclaims were premised on allegedly false, disparaging
statements in LMA's advertising regarding Ambu's
products. CNA agreed to defend LMA on the counterclaims.
National Union does not dispute that the counterclaims were
covered by its insurance policy.
2009, the district court granted summary judgment in
Ambu's favor on the patent claims and denied LMA summary
judgment on the counterclaims. The district court stayed the
counterclaims pending resolution of LMA's appeal. In
2010, the Federal Circuit reversed dismissal of the patent
claims. Laryngeal Mask Co. v. Ambu, 618 F.3d 1367
(Fed. Cir. 2010).
parties then held a mediation on January 10-11, 2011.
National Union did not attend the mediation, but CNA did.
LMA's counsel, Stephen Marzen, updated National Union
each day. On the second day, LMA and Ambu reached a
conditional settlement agreement, under which Ambu would pay
LMA $8.75 million for the patent claims while LMA would pay
Ambu $4.75 million for the disparagement claims. The
settlement was conditioned on LMA's ability to obtain
approval and funding from CNA and National Union.
CNA committed its full $1 million limit, National Union was
reluctant to recognize that Ambu's counterclaims could
invade its coverage layer. On February 14, 2011, National
Union requested an updated analysis of liability and damages
from Marzen. Marzen had previously provided National Union
with information regarding the counterclaims, including
copies of pleadings and discovery, verbal reports, access to
other information, and a January 22, 2010 case report
assessing potential liability. The 2010 case report explained
that, if the counterclaims went to trial, Ambu could support
its damages claim by using internal LMA executive-level
emails that suggested knowledge of a false advertising
campaign. The report concluded that LMA's possible
liability ranged up to $10 million, excluding potential
March 17, 2011, LMA provided the updated analysis requested
by National Union. The analysis concluded that,
"considering the risk of a damages award substantially
in excess of $10 million, and not counting the substantial
defense costs to defend against the product disparagement
counterclaims through trial, and possible appeal, $4.75
million is a fair and reasonable settlement of Ambu's
product disparagement counterclaims." LMA also informed
National Union that CNA had approved the settlement and
committed its policy limit. LMA requested a prompt reply,
explaining that "time is scarce."
March 23, LMA repeated its request for a response. Two days
later, LMA again requested a response and clarified that
National Union's options were to (1) accept the
settlement, (2) reject the settlement and take over the
defense, or (3) reject the settlement and refuse to undertake
the defense, leaving LMA the option of pursuing reimbursement
in a subsequent action.
March 25, 2011, National Union sent a list of questions to
Marzen about the proposed settlement. Marzen replied four
days later, and followed up with a conference call during
which he again stated National Union's three options.
National Union promised to respond by April 1, but later
committed to "Wednesday [April 6] at the latest."
April 7, 2011, National Union declined to consent to the
proposed settlement without offering to take up the defense.
On April 13 and 14, LMA again requested that National Union
take up the defense if it chose to reject the settlement. LMA
stated that, absent a prompt response, LMA would finalize the
still not heard from National Union regarding taking over the
defense, LMA finalized the settlement with Ambu on April 18.
LMA promptly notified National Union. On April 21, National
Union advised that it would assume the defense of the
underlying suit if LMA could "undo" the settlement.
LMA promptly responded that the executed settlement could not
be undone. LMA further stated that National Union had acted
in bad faith in handling the matter, including by waiting
until after the settlement to state a willingness to take on
the defense, ...